We Could Have Used a Mr. Hawtrey

This week appeared a key inflection point in regard to deteriorating economic
expectations for the U.S. and global economy. Despite today's almost 220-point
reversal, the Dow ended the week with a decline of 1%, while the S&P500
dropped 2%. The Transports and Morgan Stanley Cyclical indices declined 2%,
with the Utilities sinking 3%. Defensive issues outperformed, with the Morgan
Stanley Consumer index posting a marginal gain. The broader market suffered,
as the small cap Russell 2000 and the S&P400 Mid-Cap indices declined better
than 2%. The technology sector came under heavy selling pressure, with the
NASDAQ100, Morgan Stanley High Tech, and NASDAQ Telecommunications indices
all hit for 6%. The Semiconductors sank 7% and The Street.com Internet index
8%. Biotech stocks fared little better, with a 6% decline for the week. Financial
stocks were mixed, with the S&P Banking index declining only 1%, as the
AMEX Securities Broker/Dealer index was pummeled for 6%. With bullion up $6,
the HUI gold index jumped 5% this week.

The credit market enjoyed a strong performance, with 2-year Treasury yields
collapsing 19 basis points to 3.70%. The yield curve steepened, with 5-year
Treasury yields declining 13 basis points to 4.52% and the key 10-year Treasury
yield dropping 10 basis points to 5.05%. Long-bond yields dipped 8 basis points
to 5.50%. Mortgage and agency securities rallied strongly as well, with yields
dropping 14 and 12 basis points respectively. Dollar selling continues, with
the euro trading to its highest level against the dollar since early May. The
yen also posted strong gains this week, trading to its highest level in almost
two months, as Asian currencies generally made up ground on the U.S. dollar.

According to Bloomberg earlier in the week, inflation-linked Treasury bonds
have outperformed Treasuries so far this year, generating returns of 8.1% compared
to 2.7% for the long-bond. From (www.marketnews.com)
Gary Rosenberger's excellent Reality Check Column: "US Insurers Say Commercial
Premiums Up Sharply: Commercial insurance policy premiums are rising at the
fastest rate in 14 years, and some brokers suspect poor investment returns
may be partly responsible. Increases average around 10% and 15% this year,
and there are anecdotal tales of far higher renewal rates for selected businesses,
they add. Commercial premiums are vulnerable to an array of pressures, including
cooling competition for market share, soaring jury awards, renewed medical
inflation and a growing awareness that policies have been underpriced, particularly
in disaster-prone regions, they say." Quoting the president of the Council
of Insurance Brokers of Greater New York: "The pressure is on the insurance
companies. Where they used to make double-digit gains on their investments,
they now have to make it up in underwriting profits. They have to raise premiums
in order to cover their investment losses For 10 years the insuring public
has experienced declining premiums and now they're paying the price In
the past, double-digit returns on investment could forgive bad underwriting
decisions."

The National Association of Realtors released second quarter data on Condo
and Co-op sales this week. Unit sales were up almost 4% from second-quarter
2000, while median prices jumped almost 10%. Price gains were led by a 13%
rise in the Northeast, 11% in the Midwest, and 9% in the South. Consistent
with the detached housing market, the notable aspect of the data is the pervasiveness
of the nationwide housing inflation. But, after all, it is very much a national
real estate finance "Superstructure" behind the explosion of mortgage
credit. During the past 10 quarters, national median Condo prices (mean prices
unavailable) are up 21%, with a 25% increase in the Midwest, 21% in the South,
20% in the Northeast, and 12% in the West.

Inside Mortgage Finance estimates that a record $550 billion of 1 to
4 family mortgages were originated over the past three months. This is truly
an astounding number, with 2001 almost certain to shatter previous mortgage
lending records. From GMAC (through PRNewswire): "Residential Funding
Corporation (GMAC-RFC) today announced it surpassed $12 billion in issuance
of asset-backed (ABS) and mortgage-backed securities (MBS) in first half 2001.
The company also reported June was its largest issuance month ever, with $4.75
billion in securitizations." GMAC's issuance includes $4.4 billion of "jumbo" mortgages,
$3 billion subprime, and $1.6 billion of "home equity and high loan-to-value." Since
the failures of FirstPlus, Cityscape, Empire funding and others, GMAC has become
one of the major lenders in the subprime mortgage arena. Interestingly, while
GM's second-quarter global automobile sales declined 7% from last year, GMAC
revenues were up 10%. Sign of the times

From Bloomberg: "Commercial mortgage lending by life insurers rose to
the fastest pace in four years in the second quarter, as falling interest rates
spurred refinancing and borrowing by property owners and buyers. Mortgage lending
commitments from life insurance companies totaled $7.6 billion in the second
quarter, up 41 percent from $5.4 billion a year earlier, the American Council
of Life Insurers said in its quarterly survey. It was the fifth time the quarterly
commitments topped $7 billion since the poll's inception in 1965. The second-quarter's
volume was the highest since the last three months of 1997, and the number
of loans made, 743, was the highest since 1979..."

In a development to follow closely going forward, it appears the explosive
broad money supply growth experienced since last October is beginning to wane.
Last week, broad money supply declined $10 billion, with institutional money
fund assets dropping $12 billion. While it is too early to feel confident in
a change in trend, M3 is basically unchanged over the past four weeks. Importantly,
after expanding at a 60% annualized rate from October 30th to its high watermark
of $1.023 trillion during the week of July 2nd, institutional money fund assets
are basically unchanged over the past six weeks. Retail money fund asset growth
has slowed markedly as well. During the past year, M3 has surged $817.6 billion,
or 12%.

According to TrimTabs.com, investors pulled almost $15 billion from equity
mutual funds during July, the first outflows since March. This, along with
July's weakened auto sales and anecdotal signs of an unimpressive month of
home sales, is indicative of a change in consumer liquidity positions consistent
with what we would expect from a tempering of the mortgage refi boom. Interestingly,
however, refi activity has now bounced back strongly over the past four weeks
and remains up 380% from last year's level. And while it is tempting to use
June's reported drop in consumer debt as an indication of tempered consumer
borrowing, I'm not yet ready to make that call. Non-seasonally adjusted, consumer
borrowing was up slightly during the month, with "revolving" credit
growing 11% year over year. We also know from second-quarter earnings reports
that all the major monoline credit card lenders reported strong receivable
growth. We also saw Citigroup's North America card division receivables up
13% year over year, JPMorgan credit card receivable up 15% y-o-y, Bank America
consumer loans up 10%, and Wells Fargo credit cards up 11%. Credit growth for
the 10 largest Visa and MasterCard issuers was said to have grown at a 14%
rate during the second quarter.

While tax rebate checks complicate the analysis, it is worth noting that July
retail sales appear generally satisfactory. According to Bank of Tokyo data,
same-store sales were up 3.4% year over year, compared to June's 2.8%. Wal-Mart
enjoyed sales "above plan," up 13.9% from last year to $16 billion
(four week sales). On a same-store basis, Wal-Mart sales were up 6.9%. Target
same-stores sales increased 5.7%. And indicative of the strong inflation now
conspicuous throughout the health care industry, same store sales for the drug
store group were up 9.5% for July, the strongest performance since April.

For those of us with a keen interest in economics this could not be a more
fascinating (and for some of us fearful) environment. We live in truly extraordinary
times, with the further curious dynamic that developments seem almost to move
in slow motion. Perhaps it gives us analysts too much time to think, although
there sure is good fodder for pontificating. Making things even more interesting,
the current environment definitely offers something for everyone, with myriad
of crosscurrents and inconsistencies providing support for various perspectives
and theories. Indeed, one can look at the global technology sector, commodity
prices, and manufacturing profits and build a decent case that we are in a
deflationary environment. On the other hand, is it reasonable to speak of deflation
in the U.S. when broad money supply is in the midst of an historic expansion,
wages are rising strongly, almost certainly record mortgage lending continues
to stoke home price inflation, healthcare and energy costs are surging, and
for three years since the global deflationary scare back in 1998 general consumer
prices have been rising steadily? If a poll were taken, how many households
would state that their cost of living was in decline?

The bulls today could also build a rather convincing case for the continued
resiliency of the U.S. economy. After all, we have experienced an historic
technology bubble collapse without the U.S. economy yet experiencing even one
quarter of negative GDP growth. Home sales are near a record pace, we are on
track for one of the strongest years of auto sales, and consumers are generally
content to keep borrowing and spending. One with a bullish persuasion would
ask how this could not be interpreted as irrefutable evidence of sound underpinnings.
Besides, we have continued reports of strong productivity gains, and doesn't
conventional economic doctrine tell us that this ensures rising corporate profits,
unending government budget surpluses, and steady increases in general standards
of living? Conventional analysis would also expect uninterrupted benefits from
a highly "effective" contemporary financial system "efficiently" allocating
our limited savings to productive investment.

Even within the "bear camp," there are rather stark differences
in analytical perspective. Those viewing the world from the "Austrian" perspective
certainly have sound justification for using the great analytical framework
developed from the likes of Mises, Hayek, and Rothbard on the causes of the
Great Depression. This line of analysis includes the critical issues of overinvestment
and malinvestment, with a keen focus on capital goods investment. But while
this analysis is obviously pertinent in analyzing the technology boom and bust,
is it in itself adequate in gaining a comprehensive understanding of the greater
U.S. Bubble? I could not think more highly of the great work of Mises and Hayek,
and their analysis is invaluable in understanding the painful adjustments to
an industrial based economy back in the 1930s. But as an objective analyst,
I struggle with the idea of placing too great an emphasis on "over investment" and
production themes as the critical factors in the recent U.S. boom. It seems
to me today too much like trying to force a square peg into a round hole.

Considering the complex backdrop and apparent market perceptions of increasing
U.S. and global economic vulnerability, I felt compelled this week to revisit
Gottfried Haberler's classic, Prosperity and Depression. Published in
1937, it provides an excellent exposition of various business cycle theories
that were at the forefront during the heyday of this type of economic analysis
throughout the Great Depression.

"Money and credit occupy such a central position in our economic system
that it is almost certain that they play an important role in bringing about
the business cycle, either as an impelling force or as a conditioning factor.
During the upswing, the physical volume of production and of transactions
grows while prices rise, or, in some rather exceptional cases, (footnote: "American
boom of 1926-1929") remain constant The purely monetary explanation
of the business cycle has been most fully and most uncompromisingly set out
by Mr. R.G. Hawtrey. For him the trade cycle is 'a purely monetary
phenomenon' in the sense that changes in 'the flow of money' is the sole
and sufficient cause of changes in economic activity, of the alternation
of prosperity and depression, of good and bad trade According to Mr.
Hawtrey, the trade cycle is nothing but a replica, on a small scale, of an
outright money inflation and deflation. Depression is induced by a fall
in consumers' outlay due to a shrinkage of the circulating medium the
prosperity phase of the cycle, on the other hand, is dominated by an inflationary
process. If the flow of money could be stabilized, the fluctuation in
economic activity would disappear. But stabilization of the flow of money
is no easy task, because our modern money and credit system is inherently
unstable. Any small deviation from the equilibrium in one direction or the
other tends to be magnified."

"The upswing of the trade cycle is brought about by an expansion
of credit and lasts so long as the credit expansion goes on or, at least,
is not followed by a credit contraction. A credit expansion is brought
about by the banks through the easing of conditions under which loans are
granted to the customer Prosperity comes to an end when credit expansion
is discontinued. Since the process of expansion, after it has been allowed
to gain a certain speed, can be stopped only by a jolt, there is always
the danger that expansion will be not merely stopped but reversed, and
will be followed by a process of contraction which is itself cumulative

Mr. Hawtrey's theory explains why there were not merely small oscillations
around the equilibrium, but big swings of the pendulum in the one or the
other direction. The reason is the cumulative, self-sustaining nature of
the process of expansion and contraction. The equilibrium line is like
a razor's edge. The slightest deviation involves the risk of further movement
away from equilibrium the expansion could go on indefinitely, if there
were no limits to the increase in the quantity of money."

Obviously, contemporary economic systems are incredibly complex, with myriad
of non-monetary factors interacting with quite intricate and powerful monetary
influences. What I propose is that sound monetary analysis today unequivocally
provides the most valuable foundation for economic understanding. The "classical" economic
viewpoint of money as merely a "veil" for the real economy could
not leave analysis at a greater disadvantage currently. It is as well senseless
to get lost in nebulous economic notions such as today's fixation on "productivity" and
the "efficient allocation of savings," when true and "tangible" insights
can be garnered by the close examination and analysis of money, credit, and
key monetary processes. According to Mr. Hawtrey, "credit holds the predominant
position," and "banks create purchasing power in the process of creating
credits." And, importantly to Mr. Hawtrey's analysis, (and a definition
I adamantly subscribe to) "inflation means too free creation of credit." "It
is the instability of credit that is perpetually involving the world in credit
expansions "

Interestingly, Mr. Hawtrey's analysis (his classic Currency and Credit was
published in 1919) was generally superceded during the Great Depression by
the seemingly more pertinent "overinvestment theories" of "Hayek,
Machlup, Mises, Robbins, Ropke and Strigl" and then with the Keynesian
revolution. All the same, I sense that Hawtrey's perspective today actually
provides much greater insight than investment and production theories, as it
encourages us to focus on the critical points of credit creation, the resulting
effects of the additional purchasing power, and the ramifications for a possible
breakdown of key monetary processes. I will also admit to finding his work
even more intriguing after watching the powerful U.S. credit system and the
incredible resiliency of monetary forces over the past year. I could not be
more convinced as to the dominant and precarious role continued to be played
by extreme credit excess in sustaining the maladjusted, "service sector-based" U.S.
Bubble economy.

"As has been mentioned, Mr. Hawtrey's theory stands in contradiction
to many other related theories in that it contends that a change in the
rate of interest influences the economic system, not through a direct influence
on investment in fixed capital, but through the provision of working capital
and particularly stocks of goods The banks, and especially the leaders
of the banking system, the central banks, should not watch the reserve proportions
so much as the flow of purchasing power. The demand for goods, the flow of
money, is the important thing - not the outstanding aggregate of money units. The
aim of banking policy should be to keep the consumer's outlay constant, including
outlays for new investment " (Haberler, Prosperity and Depression)

"The existence of any large class of traders, whether it be bankers,
underwriters, finance companies, or many others, with long-period assets
and short-period debts, is always a source of trouble." (Hawtrey, Currency
and Credit)

What sets Mr. Hawtrey's analysis apart is his attention to "the causes
and the nature of these cyclical movements" with specific focus on those
in "strategic position" for instigating credit expansion. In his
case, these were the merchants and dealers in commodities, capital assets,
and securities (in concert with the bankers). It was these "traders" that
were key to the inflationary and deflationary rhythm of the trade cycle: "there
exists one class of business-men which is very sensitive even to small changes
of the rate of interest." The key to this line of analysis is recognizing
the players, instruments, mechanisms, and monetary processes for creating credit
at the margin, and appreciating the direct and indirect influences of the increased
spending power. Today, the demand for securities, the flow of liquidity,
is the important thing.

It is my contention that, especially since 1998, extreme Federal Reserve accommodation
has had its most direct influence on "traders" of financial assets,
in particular the "leveraged speculating community." The resulting
major inflationary manifestation was first largely isolated in the spectacular
technology bubble, with wild speculative and spending excesses. Over time,
credit-inflation induced general spending excesses and impacted household income
and consumption, which manifested into enormous trade deficits. Endemic U.S.
current account deficits were then a major factor in increasingly enormous
and destabilizing global financial flows, in a self-feeding monetary disorder.
The inevitable bursting of the technology bubble - in concert with the Fed's
well in advance advertised drastic rate cuts, then led to only more aggressive
accumulation of leveraged positions in the U.S., particularly in mortgage and
asset-backed securities, and mortgage agency debt. I contend that the Fed's
dramatic interest rate cuts incited massive foreign-sourced speculative flows
into U.S. credit market instruments (recycling of inflationary U.S. trade deficits),
as the U.S. became the focal point for global leveraged speculation. These
aggressive rate cuts further fed the dollar Bubble.

"The general rise of prices will involve a proportional increase of
borrowing to finance a given output of goods, over and above the increase
necessitated by the increase in output. This increase of borrowing, meaning
an increase in the volume of credit, will further stimulate trade. Where
will the process end? In the case of the curtailment of credit the self-interest
of the bankers and the distress of the merchants combined to restore the
creation of credits but in the case of the expansion of credits there
is no such corrective influence at work. An indefinite expansion of credit
seems to be in the immediate interest of merchants and bankers alike. The
continuous and progressive rise of prices makes it profitable to hold goods
in stock thus the merchant and the banker share between them a larger
rate of profit on a larger turnover... The greater the amount of credit created,
the greater will be the amount of purchasing power and the better the market
for the sales of all kinds of goods. The better the market the greater the
demand for credit. Thus an increase in the supply of credit itself stimulates
the demand for credit (Hawtrey, Currency and Credit)

In Hawtrey's day, the "dealers" were generally borrowing to finance
inventories of goods. He saw such "dealer" credit growth as a key
to creating the purchasing power that then fostered increased production, profits
and wages. This analysis recognized the critical and direct link from credit
expansion to income (while most others identified the flow from investment
to income). "The consumers' purchasing power is therefore largely supplied
out of the credits which the traders borrow from the banks the supply
of purchasing power is thus regulated by the transactions which require to
be financed. (Hawtrey, Currency and Credit)." Hawtrey, moreover,
recognized that "self interest prompts both the enterprising trader
ever to borrow more, and the enterprising banker ever to lend more, for to
each the increase in credit operations means an increase in his business (Hawtrey, Currency
and Credit)." Again, the contemporary comparison is with those taking
leveraged speculative positions in financial assets and those providing the
financing.

This line of analysis today has profound ramifications for the U.S. financial
system and economy. It is my contention that credit creation emanating from
the financing of momentous speculative holdings of U.S. financial assets has
surreptitiously become the critical lifeline for the U.S. Bubble economy. First,
there was the NASDAQ/technology inflation, and then upon the bursting of the
tech bubble unrelenting financial system liquidity was made possible as wild
credit excess engulfed the mortgage and consumer finance sector. Over time,
this financial credit creation has involved the accumulation of $100s of billions
(almost certainly trillions) of borrowings, that have driven extreme financial
asset inflation, housing inflation, and, increasingly, an acceleration of income
growth. These unstable monetary processes have also over time come to indelibly
shape underlying economic structures. Importantly, this Credit Bubble has instilled
a dangerous perception of limitless availability of finance, as well as perceptions
of perpetual asset and wage inflation. Financial Credit excess, in particular,
created the firepower for reckless spending throughout the Internet/telecom/tech
sectors despite a dearth of true savings. It is furthermore the continued expansion
of speculative financial borrowings that currently fosters the "terminal
stage of excess" throughout consumer debt/mortgage finance. This is monetary
disorder and fragility in its purest form.

As discussed in previous Bulletins, it is our view that this type of credit
excess is particularly destabilizing and dangerous. For one, it fuels seductive
asset inflation, with the related structural maladjustments and misallocation
of resources to the real economy. Such processes feed heightened monetary disequilibrium,
with self-reinforcing credit and speculative excess and only more problematic
financial and economic distortions. We have argued repeatedly that the monetary
disorder emanating from the 1998 system bailout led to a virtual breakdown
in the market pricing mechanism. This may sound like hyperbole, but I strongly
argue that since 1998 a dysfunctional U.S. financial sector has instigated
processes overwhelmingly driving an endemic pursuit of speculative financial
gains (tech and mortgage Bubbles!), at the great cost of neglecting the financing
of true economic wealth creation capacity. Historians will not look favorably
at Mr. Greenspan's claims of an "efficient allocation of resources."

"We have traced the instability of credit to its source we found
that the initiative in production rests with the merchant and the promoter,
the dealer in commodities, and the dealer in capital issues." (Hawtrey, Currency
and Credit)

Over this long boom, we have watched as the pursuit of financial returns became
paramount throughout the entire U.S. system, increasingly replacing the diligent
pursuit of sound investment and true economic profits. The bulls can rationalize
all they want, but the "bear case" can be stated rather succinctly:
if a system borrows and speculates in excess, there's going to be a problem.
If overborrowing and speculation become endemic and allowed to progress over
a long period, and the created purchasing power is spent recklessly, there
is one big unavoidable problem and necessary adjustment process. The technology
Bubble may have looked wonderful at the time to those studying company earnings
momentum or salivating at the yields telecom companies were more than willing
to agree to. But there was never a sliver of doubt in our minds as we watched
enormous credit and speculative excess feed reckless spending (very little
of it qualifies within our definition of "investment") that would
certainly prove hopelessly uneconomic, hence problematic. Our focus was on
the liabilities created, and the impossibility that expenditures would generate
the future cash flows required to validate the debt levels and equity valuations.

There is similarly absolutely no question that the continuing massive creation
of mortgage credit is generating spending power that is adding little if any
true economic wealth creating capacity. Why would anyone not believe we are
in the midst of a precarious Bubble with the creation of enormous additional
liabilities not supported by any measurable increase in underlying economic
assets? It truly is credit inflation in its most conspicuous and disconcerting
form. Sure, the GSEs and the financial sector can create mountains of mortgage
securities and inflate home prices, while stoking consumption. And the longer
it continues, the more it may appear that rising wages will validate inflated
home prices. We can furthermore stuff the new mortgage securities into the
Social Security Trust Fund or use them to acquire more foreign goods. But let's
not kid ourselves. This is anything but investment - the prerequisite for providing
the means of satisfying future economic wants and needs for our retirees or
foreign creditors. This is unsound credit inflation, not investment, and it
will come to a disappointing end.

But, for now, current monetary processes overwhelmingly encourage only more
self-reinforcing creation (and speculative positioning) of mortgage and agency
securities. In fact, a strong case can be made that the protracted period of
monetary disorder has led to a complete breakdown of the U.S. financial system
as a mechanism of effectively channeling resources to sound investment. It
has, instead, developed overwhelmingly into a mechanism creating financial
credit and funneling the resulting speculative flows (domestic and foreign)
required to sustain a massive financial and economic Bubble. This the financial
system does quite effectively. As a diligent analyst, carefully examining the
scope of continuous credit excess as well as the dearth of additional underlying
economic wealth supporting these liabilities, there is just no way to view
this other than as an unfolding financial and economic disaster. It also appears
so patently obvious that we have been expecting a reaction in the foreign exchange
markets.

While there was certainly recognition, particularly by the "Austrians," regarding
the acute structural damage imparted on the U.S. economy during the 1920's
Bubble, there has been little recognition for what I see as the other crucial
aspect of large-scale financing of speculative security positions: systemic
liquidity issues related to the accumulation of huge amounts of speculative
financial credit. What are the ramifications for an economy and financial system
when the key "strategic" credit creation mechanism has become financing
speculative holdings of financial and other non-productive assets? And recognizing
the momentous impact of this historic monetary expansion (technology and mortgage
finance booms), what are the systemic consequences when this source of money
and credit growth is disturbed? What if the monetary flows reverse? Yes, credit
growth and resulting asset inflation are certainly self-sustaining, but we
at the same time see them as unsustainable and acutely vulnerable to changing
perceptions. Surging margin debt (and derivative related leverage) was a powerful
source of monetary expansion, only to abruptly reverse with the bursting NASDAQ
Bubble. The ramifications for the piercing of the mortgage finance Bubble are
significantly more problematic.

The monetarists blame the Federal Reserve for not creating sufficient money
to stem the post-1929 crash deflation. But if the monetary processes of the
U.S. financial system had come to be dominated by extending credit to speculative
asset markets, and the bubble had burst, why would this not necessitate a collapse
in the debt from the previous monetary inflation? Importantly, credit expansion
involves the creation of liabilities, and if the cash flows generated by the
underlying assets prove insufficient to service the debts, there will be debt
impairment and asset liquidations. There is furthermore the issue of forced
sales of speculative marketable securities positions - and the resulting deleveraging/contraction
of credit - come the bursting of the Bubble. Unfortunately, we today view a
significant and unavoidable "deleveraging" as a prerequisite for
a return to monetary stability. Looking at the 1980s Bubble in Japan, with
speculative asset Bubble processes playing a key role in monetary expansion,
why would one not expect the unavoidable collapse of the speculative bubbles
in the equity, real estate, and other (golf club memberships!) asset markets
to usher in a protracted period of monetary stagnation/deflation? Is it government
ineptness, or more a case of it being exceedingly difficult to foster monetary
expansion in post-asset Bubble economies? I would argue the latter.

Mr. Hawtrey was born near London in 1879 and worked in the British Treasury
from 1904 to his retirement in 1944. His work had considerable influence both
domestically and internationally. From the New Palgrave Dictionary of Economics: "At
the Treasury Hawtrey had argued that there were two primary considerations
for monetary policy: the stabilization of internal prices and the stabilization
of the foreign exchanges. Given the UK's status as a financial center he argued
that exchange instability was particularly damaging and would make the covering
of trade finance offered through London increasingly difficult. This predisposed
him towards the Gold Standard as the de facto most practical means of achieving
exchange stability."

"The actual variations in the value of the monetary unit are the result
of the regulation of credit, which rests in the discretion of the bankers. The
use of gold as an international currency tends to prevent credit conditions
in any one country from deviating from those in the others in more than a
certain limited degree " (Hawtrey, Currency and Credit)

He was an ardent and uncompromising proponent of global monetary stability,
and for that reason alone we have great appreciation for his contribution to
economic understanding. Unfortunately, his valuable insights on the danger
of uncontrolled credit expansion have for too long been forgotten or simply
disregarded. Perhaps he displayed more passion and conviction in his views
and was too outspoken for the crowd. We will not hold that against him. We
Could Have Used a Mr. Hawtrey during this historic period of runaway credit
excess, and U.S. led global monetary instability.

"Paper money which is not convertible into (gold) coin is a sham, a
fraud. He who sells goods for paper money sells something for nothing; likewise
he who sells them for credit payable only in paper money This severe
and uncompromising doctrine has owed its success rather to its practical
utility than to its theoretical perfection. It has grown up out of the political
contests which have raged from time to time about currency questions. Attacked
and defended by a thousand politicians and pamphleteers, it has held the
field as the only theory which provides an intelligible, self-consistent,
workable system. The economists, at any rate for the past half century, have
not paid such unreserved homage to it as the practical men It is the
only bulwark against inflationism, that insidious financial vice, which seems
so attractive, but over-indulgence in which may enfeeble or wreck the system." (Hawtrey, Currency
and Credit)